I'm Ken McElroy with Ken McElroy comm so
what happens a lot of times when people
are trying to buy real estate is they
focus on the price and while I totally
understand that you need to look at the
price the price is not necessarily the
first thing to look at what we're trying
to do here was right we're trying to buy
real estate that cash flows we're not
trying to buy real estate that goes up
in value massively and sell it because
if we sell it we have a lot of tax and
we're trying to avoid tax so most of our
investors when I started out it was just
my money and eventually I ran out of
money so maybe like a lot of you where
you use your own money buy one thing
then you use your own money to buy a
second thing and eventually that money
runs out so you have to learn how to
raise money so this video will also help
you understand how to raise capital
because people that invest in you they
also invest in the deal
so they invest in you as the management
team and they want to know who you are
what your track record is and what kind
of team you've generated but more
importantly that's a check the box but
they really want to know does the deal
cash flow does a cash flow or you're
trying to time the market most deals are
trying to time the market that's why if
you learn this information you'll have a
huge competitive advantage if you can
understand how to put people's money to
work generate massive income create
massive value and then give it back to
them tax-free you'll have investors for
life so that's what I'm going to teach
you now so the very first thing that
we're gonna go through are some of the
very basics that you need to review on
every single deal so every single deal
has four components the first one it's
very simple its income no income can
come in many forms so let's say that
you're a flower shop your income are the
people that walk in and buy flowers
if you're an apartment building there
your renters they come in and they pay
you rent that's your form of income for
a reoccurring business model on the
internet it might be a subscription base
of $9.99 or $29.99 a month you know for
Amazon you know it's selling products
right so so every and for Starbucks its
selling coffee so income is income and
you personally have your own income it's
called a paycheck for a lot of use so
when you go to work and every two weeks
you get your paycheck that's your income
so it's really not a complicated subject
but in this particular case income for
me primarily our renters and so so I
focus entirely on renters and what I'm
trying to do here is I'm trying to grow
the income so the properties that I buy
I'm looking for properties that have
problems I'm looking for properties that
have low occupancy I'm looking for
properties that have income potential so
just like everything else let's say
let's say you go down to your
neighborhood Starbucks when you walk in
there they don't just have coffee they
have food they have stuff at the
register you can buy CDs you know
there's all kinds of things all around
same thing in a grocery store that you
can buy as you're walking through it's
the exact same process except we're
talking about real estate so for us for
income we're looking for ways to
monetize pets we're looking for ways to
monetize views we're looking to put
washers and dryers and units and to be
able to monetize that so so back 10
years ago we were buying properties that
had washer and dryer capacity they had
laundry rooms but they didn't have
washers and dryers so we were buying
hundreds of thousands dollars of washers
and dryers every year and putting them
in and then charging the ten at fifty to
seventy-five dollars per month so that's
part of generating income another way is
to put up car ports because people love
their cars and so covered parking you
know garages these are all ways to
monetize your income through real estate
and from
it's been multifamily and there's
hundreds of ways and we spend a lot of
time on this but income is a very
important piece and most people don't
understand this so what they do is
they'll try to buy things that say hey
it's sitting at ninety five percent
we're gonna grow it to 97 or 98 percent
that's not realistic you can't grow your
occupancy beyond what the markets doing
so the income is a very very important
piece and we spend a lot of time here
working on income okay we work on the
occupancy side and work on the other
income side it's a very important piece
the second piece is expenses
and this is typically a negative so
obviously expenses are everything from
payroll to marketing advertising and
marketing it would be your taxes it
would be your insurance would be all
your utilities so again think of
yourself you probably have a mortgage
you might have a rent you might have a
car payment you might have some vacation
stuff you want to do you have to buy
food maybe you have a pet so you have
that those are all expenses so the same
thing happens in real estate except for
us it's I have to pay a utility bill I
have to pay the electric company for all
the lights I have to pay a water company
for all the water that the tenants are
using it for the landscaping and I have
to pay a trash bill for the people that
come and pick up the trash so these are
all expenses with every single rental
everything every single commercial
building industrial building that's what
expenses are taxes insurance and those
are some of the things I've already
mentioned but all those things happen in
this line item and so what we're doing
is we're trying to minimize our expenses
now you're not going to get away with
minimizing them to zero of course
because every property has expenses so
what we're trying to do however is
figure out ways how do we minimize our
expense in other words if if we have the
the trash vehicles coming to the
property three times a week can they
come two times a week and pick up bigger
dumpsters that's less because it's one
less trip so that's a trip
charge that we don't have to pay anymore
so those are the kinds of things that
you start getting into when you start
buying real estate same thing with
marketing and advertising in the old
days they used to advertise in the
newspaper and then it went to these
rental books with distribution now it's
all up on the internet and they're
trying to and the Internet companies are
trying to get you to pay for ads just
like Facebook Ads
same kind of thing so it's all moved to
the Internet and so the for our company
what we're trying to do is we're trying
to minimize our marketing expenses but
but keep our traffic to our properties
high so we've been doing that through
blogging and all kinds of other things
to get people to come to our websites so
instead of paying for online ads and so
our company now doesn't pay any money in
marketing and advertising except for
salaries because the people that we pay
here at our company generate enough
marketing more than we would have gotten
for paid advertising so those are the
kinds of things that you do on the
expense side we have full-time people
that are just working on the insurance
and the taxes for all our properties
because we have over 10,000 units and so
we're paying millions of dollars every
single month on tax and insurance and we
need to make sure that we're minimizing
those all of those have to do with
generating the next number which is
called the net operating income or Noi
so a lot of people call this Noi so this
is Noi so all Noi is is your expenses
after your income how much money do you
have left over after expenses now for
many of you that's zero or even negative
so if you don't have a job your expenses
are higher than your income probably but
if you do have a job hopefully your
income is higher than your expenses same
thing with an apartment building if I
have expenses of a hundred thousand a
month and my income is 120 thousand a
month then my income for the month my
net operating income is twenty thousand
dollars a month but if my awkward see
drops down
and it's 90,000 and my expenses are a
hundred then I have a negative net
operating income so that's why managing
expenses and managing income is so
important because if you don't take care
of these things then this here will go
up or down dramatically and what you'll
find and this is essentially what we're
going to be discussing the rest of the
video net operating income is the way to
drive value and this is the way that you
create massive wealth for your investors
and for yourself if you can understand
how to generate high net operating
income then you'll do very well in this
business like I said most people buy
something and they hope that it goes up
they don't understand real estate at
this level and if you understand real
estate at this level you're gonna do
very very very well so the next piece
that we need to add is is debt or the
mortgage so when you're buying a piece
of real estate
the very next piece is called debt now
again let's say it's a single-family
house that you're buying most people are
going to the bank and getting a loan to
buy that house that's this so with big
commercial real estate deals same thing
we're buying using debt now the cool
part about debt is that it comes from
other people if you think about so thank
you by the way from putting all your
money in the bank because now the bank's
going what the heck now I have to lend
it right because when you put money into
a bank when people go to posit their
cheques into a bank it's a liability to
the bank the bank is sitting on a whole
bunch of people's money and they have to
pay you interest so they lend it to guys
like me in the form of debt to buy big
real estate deals that's the way the
banking system works yeah that's why
they give you free things to put money
into the bank free checking deposits and
free this and free that they want your
money because they lend it out higher
they give you 1% on your bank account
and then they charge me 5 or 6 to borrow
it that's how banks make money so so
debt is a very important P
of buying real estate because it's
really OPM or other people's money if
you can use debt then you can get
massively wealthy another really
important piece on debt is you've all
heard of leverage even when you're
buying your home let's say you buying a
home that's a hundred thousand dollars
and the bank gives you seventy thousand
dollars in a loan you only have to come
up with thirty thousand dollars to buy a
hundred thousand dollar house the rest
is in the form of debt they've given you
seventy percent of the amount to buy
that house or seventy thousand dollars
on a hundred thousand is seventy percent
that's called loan to value LTV so the
debt is a very important piece because
you don't have to come up with the whole
down payment you don't have to buy the
house all cash you can actually go to
the bank and this is a very important
piece to understand but the cost of debt
is very very important and banks will
give you this money if you can qualify
so why wouldn't you put thirty thousand
dollars down to buy a hundred thousand
dollar house and this is all I'm doing
in a larger scale with the ten thousand
units that we owned so obviously we're
heavy in debt and I'm very excited about
how being in debt because the tenants
that I have here are actually paying
this off the last piece after debt is
cash flow so cash flow is what we're
trying to do on every single model every
single deal I look at goes through this
process it's the exact same process so
if there's no cash flow it could be that
my debt costs are too high
it could be that my expenses are too
high or it could be that my income is
too low but that doesn't necessarily
mean that it's a bad deal because I
might buy something that has a 50%
occupancy let's say and has low income
it has a negative net operating income
but if I can increase the income over
one or two years then I can massively
generate higher net operating income and
cash flow so I'm costly looking at how
much do I have to put down in the form
of equity how much can I get in debt and
how much cash flow do I generate because
I'm investing people's money and
investing my money this is the only
thing that matters cash flow nothing
else I'm not looking at how much is the
property going to be worth in one or two
or three or four years now
I'm making sure that it goes up but I'm
actually driving the value myself by
generating that operating income because
when you go to the bank to borrow money
this net operating income is what the
bank looks at and you would - so they're
saying okay if I'm gonna give this
person debt or a mortgage I want to make
sure that this is higher than this
because if my net operating income is
not higher than my debt I'm not gonna be
able to pay my debt so this here has to
be in a really good position be able to
get maximize your debt and to maximize
your cash flow every single deal on the
planet goes through these things and
then once you understand this you can be
massively wealthy it's way different
than buying something low and trying to
sell it high has nothing they don't look
at any of these things what we're trying
to do is we're trying to invest for the
long term cash flow massively which what
eventually what we call an infinite
return so how do I take people's money
generate massive value by managing these
things take it back out in the form of
debt and return it in a cash flow back
to the investor
every single quarter every single year
that's why our investors keep coming
back to us because we are generating
massive cash flow returning their equity
back tax-free and they now are in our
deals on an infinite return thank you